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Brutal temperatures in central California this year have taken a bigger-than-usual toll on cow comfort and milk production.

That is leading at least one major dairy co-op thirsty for milk to pay premiums of $1.50 per hundredweight over recent base production through mid-September, said Sarina Sharp, market analyst for the Daily Dairy Report.

Declining to reveal the name of the co-op offering premiums, Sharp said it is encouraging its members to increase milk production, as it would like to source its milk from members.

Premiums will be paid on up to 1.5 million pounds of milk per day above producers’ June 26 through July 10 production average, she said.

Seven counties in central California, led by Tulare County, are in the top 10 milk-producing counties in the nation. Conditions there — cows have been hit hard by the heat — have a big impact on regional and national milk supply and prices, she said.

Daytime temperatures well above 100 degrees for a full week and the lack of cooler nighttime temperatures to mitigate the heat’s impact on cow stress have led to lower production in central California, she said.

That has created milk-production shortages severe enough to prompt the premiums, she said.

Scorching temperatures in central California ranged from 105 degrees on June 28 to 110 degrees on July 4, with temperatures hitting 96 degrees to 101 degrees for 17 days in July, according to AccuWeather.

In addition to decreased milk production, demand for dairy products — particularly milk powder for export — is strong due to a drought in New Zealand this spring that hit its milk production hard. California is well poised to fill that temporary export vacuum, she said.

“Even with production shortfalls, there is no shortage of milk in California,” she said.

Milk supplies are a little tight seasonally, but Dairy Institute of California members are not reporting shortages, said Rachel Kaldor, executive director of the Institute, which represent processors.

Some shortfalls are expected, given the heat and high feed costs last fall that put a crunch on milk production. Some processing plants aren’t running at full capacity, but she’s not hearing of any manufacturing problems at this point or that co-ops are not able to supply enough milk, she said.

The situation seems to be that one co-op is trying to buy more milk, and it appears to be Land O’Lakes that has the shortages, she said.

Last year’s exceptional spring flush resulted in a lot of milk, and Land O’Lakes released 17 of its supplying dairies. This summer’s extreme heat definitely has had an impact on production, but Land O’Lakes doesn’t have the reserve it might have otherwise had, she said.

Now in a time of tight supplies, the co-op has little to draw on and can’t respond as quickly, she said.

“That’s what it looks like to us,” she said.

Land O’Lakes supplied Capital Press with its 2012 annual report but the co-op does not comment on its business interactions with members, said Rebecca Lentz with Land O’Lakes corporate communications.

But a credible source familiar with Land O’Lakes has verified the co-op is offering the temporary premiums, said Michael Marsh, CEO of Western United Dairymen.

The co-op’s production shortfall is consistent with reports from Dairy Farmers of America and California Dairies Inc. of lower production (but not shortfalls) in central California, he said.

But Land O’Lakes’ retiring of farms last year is not the reason for the premiums, and the co-op was meeting its need with that adjustment until the heat hit, according to Marsh’s source.

The co-op is trying to meet the demand of global customers “screaming for product,” Marsh said.

California is the largest milk producing state in the U.S., accounting for 20 percent of the national supply. Photographer: Sam Hodgson/Bloomberg

Ray Souza’s voice cracks a bit when he says it, when he tells how his family’s Turlock, California, dairy farm is struggling to pay the bills.

“We go from black to red month by month,” the 66-year-old said. “For us, it’s break even at best.”

Souza is like many other dairy farmers in the state who say the price they’re paid for milk from cheese producers isn’t enough to cover the soaring cost of feeding cows. Those economics have caused a fifth of California’s dairies to shutter since 2007, according to state agricultural figures.

California is the largest milk-producing state in the U.S., accounting for 20 percent of the national supply. Cheesemakers buy about 43 percent of all the milk produced in California at prices set under the state’s unique pricing system rather than by federal formulas.

The dairy industry has petitioned the state to raise the prices cheesemakers must pay to buy California milk and have sought legislation to change a pricing system that dates to the 1930s. The producers say raising prices will harm them, the very people the dairy farmers need to buy their milk.

“There needs to be a balance between producer prices and what the market can bear in terms of the product we manufacture and the market for those products,” said Rachel Kaldor, executive director of the Sacramento-based Dairy Institute of California, which represents processors. “In order for us to be able to stay in business, we need to be able to buy milk at a price that allows us to do that.”

Five Classes

Under California’s system, the state Food and Agriculture Department sets the minimum price for five classes of milk. The most expensive is fluid milk found at the dinner table. The cheapest is cheese. The system was set up in part to encourage more cheesemakers to open plants in California.

Farmers say the state system pays less than federal prices for milk used to make cheese and for whey, a dairy byproduct. California’s system worked for dairy farms a half-century ago, when 60 percent of milk sold was fluid. Now, almost 80 percent is sold for products such as butter, dry milk, powders and cheese, the least profitable of the classes.

Corn Soars

With the bulk of their product sold at the cheapest prices, hundreds of dairy farms were unable to stay in business as livestock feed costs rose. Corn prices, for example, reached a record $8.49 a bushel on Aug. 10 after last year’s drought, the worst since the 1930s, lowered U.S. output by 13 percent.

Frantic to boost income, farmers have been flooding the market with as much milk as they can, causing prices to decline even more.

“The last-man-standing syndrome comes into play,” said Sybrand Vander Dussen, president of the Ontario, California-based Milk Producers Council, which represents the state’s family-owned dairy farms. “You are trying to last longer than your neighbor.”

The farmers have been pressing California Food and Agriculture Secretary Karen Ross to add as much as a $1.20 subsidy per 100 pounds to the price of milk used for cheese. The price reached $15.91 in June.

‘Antiquated’ System

Ross has said she doesn’t believe the problems facing the dairy industry in California can be fixed simply by increasing the minimum price. Last month, she again rejected their petition and opted to add a temporary surcharge of 12.5 cents per 100 pounds on average for all five classes for six months.

“California dairies and processors must operate within national and international markets that require the manufacture of milk products to be competitive with those produced elsewhere in terms of variety, price and quality,” Ross said in a letter announcing her decision June 21.

She also acknowledged that the program needs to change.

“Our system of regulated milk pricing is an antiquated one that impairs the ability of the dairy industry to rise to this challenge,” she said.

The dairy farmers pressed Assemblyman Richard Pan, a Democrat, to introduce a bill that would require the state’s milk-pricing system to more closely match how the federal program works. Pan’s bill was blocked by opposition from the cheese industry.

First Step

Nevertheless, Pan helped negotiate a short-term fix that has the cheese processors paying $110 million into a milk pool to be shared by dairy farmers while a task force devises a permanent fix.

“We needed to get immediate relief for California dairy farmers,” Pan said in an interview. “This is a good first step.”

Souza, the Central Valley farmer, said that in the last year he’s seen three of his neighboring farms go out of business. He watched one day as cattle trucks rumbled up to one of those farms and repossessed the owner’s Jersey cows.

“She was sitting off to the side and crying,” Souza said of the owner. “There is so much emotion right now in the industry. These are folks who have worked their entire life in dairy, sometimes multiple generations, and suddenly they don’t have a farm anymore.”

To contact the reporter on this story: Michael B. Marois in mmarois.

To contact the editor responsible for this story: Stephen Merelman at smerelman

Production was down in some western states, but production in the Midwest took up the slack, and production in the West is recovering.

Milk prices have been pretty good, with Class III over $18 per hundredweight and Class IV over $19 per hundredweight. The downside is feed prices are higher than usual, he said.

Good milk prices are likely due to good demand for dairy products. Food service and retail sales have been very good, with food services sale in April posting the best month ever seen, he said.

Exports of dairy products haven’t matched the torrid pace seen earlier but they’re still good and expected to get better. Milk production is down in most of the rest of the world, and while U.S. inventories of dairy products are huge, the EU and Oceana have very little inventory, Dryer said.

That will have international customers coming to the U.S. for product, and exports should be strong in the third quarter, he said.

Right now, however, U.S. inventories are overwhelming. Demand has been good, but such large inventories in the past would have had cheese and butter trading at $1.20 to $1.30 a pound. Cheese is currently trading at about $1.70 a pound, and butter is trading at about $1.50 a pound. And milk prices are above the five-year average, he said.

“We’re operating in a different world,” he said.

Robin Schmahl, commodity broker and owner of AgDairy LLC, Elkhart Lake, Wis., said he expects things to stay sideways and choppy in the cash markets in the near term and doesn’t see anything to spur substantial purchases by end-users.

There’s been pretty good movement in inventories of dairy products but if milk production remains steady and more product is added to inventories, there’ll need to be good demand to support prices, he said.

Even though manufacturers have been steadily shipping overseas, they still have large stocks, and that could mean lower milk prices later in the year. Especially if USDA’s projection of 2 billion bushels of carry-out corn proves true.

High corn stocks could lower corn prices to $4 a bushel. Lower feed costs are not going to curb milk production and would instead lead to lower milk prices, he said.

Class III milk is trading at about $18.50 per hundredweight, which is not a bad price and not likely to move much. If USDA’s May Class III price in federal orders is $18.50, it’ll be the highest Class III price since September of last year.

Class III futures are trading in the $18 range through November, and prices have been in the high $16 to $18.50 range since September. But they could go lower with a good corn crop and building corn stocks, he said.

“It doesn’t seem like the (corn) market is going to be too tight,” he said.

World demand for dairy products has been good, with buyers coming into the market to buy cheese despite a bump up in prices. Powder and whey supplies are tightening, but that’s not going to have a large impact this year, he said.